Tuesday, June 20, 2006

Perks for those who don't need them

THAT we need investments, both foreign and local, is not the issue in the debate about fiscal incentives in the Philippines. We have been stressing that the Philippines needs everybody’s help, including those of foreign and local investors, to develop this country. Whether or not fiscal incentives are the best way to achieve them, however, is the real question. Our position has been consistent and clear enough—that there are better and effective ways to promote investments other than fiscal incentives. The Federation of Philippine Industries (FPI), for one, has made a good case of the more important tack of lowering the cost of doing business than, say, haphazardly giving income-tax holidays.

Admittedly a few fiscal incentives, well-thought-out and validated by experience, may do the trick, but these are rare. Moreover, there are ways to reform the system that do not disrupt the operations of those who are already doing business within the country’s borders and have enjoyed such perks.

How? Remember that fiscal perks, say tax holidays, are time-bound and constitute, in effect, a contract between the government and the investors. The government therefore will have to allow them to complete the full terms of those projects, providing safeguards against abuse while Congress is reforming the system that has been draining the country of substantial forgone revenue.

Our main problem with fiscal incentives is the ease with which they can be easily abused to the detriment of the public. The BOI, through its Investment Priorities Plan, has been granting incentives to certain industries, without a clear and strategic view of what it wants to achieve for the country. To attract investments? Certainly it has fallen below expectations here. To spread investments in the countryside? It has failed in this regard also because fiscal incentives are not likely to counteract serious barriers to investments like poor roads, peace and order problems, and other constraints borne out of the structural problems.

Do we need to promote export? To promote tourism? Or information technology? Definitely yes. But according to Prof. Renato Reside of the UP School of Economics, 95 percent of the overall value of BOI investment portfolio is not exporting. It’s not IT-related. Neither is it tourism-related.

These statistics mean that those who got the perks are mostly those who don’t need them or would have invested just the same because there is simply too much money to make with or without the perks. Reside says that companies investing could be classified into domestic market-seeking, resource- seeking and efficiency-seeking, and the first two are simply redundant ones that don’t need the perks. In a word, the good professor says that a regime of misplaced incentives” is largely to blame for deepening poverty in this country.

In a saner context, industries like telecommunications, mining and real property development don’t need the perks because they are just too profitable and redundant. Yet most of these projects got the perks for some reason that only the BOI and PEZA can explain. The result is that the government is not collecting the money that the country needs to finance development. Lacking the money after giving all the perks to rich, the government instead is squeezing the general public—nay, the fixed-income employees—as well as the consumers to fund the operations of the state through higher income and value added taxes. As one analyst put it, this seems to be the case of a government that gave the money to the rich and then squeezes the poor.

Who determined which industries needed these perks? They are unelected bureaucrats of the BOI, Peza and other government agencies—and the apparent irrationality in some of their decisions have inevitably led to suspicion in some quarters of collaboration with certain vested interests. The suspicions could have been quelled if the basis for their decisions were clear. Nobody seems to know such, however, because these institutions are never transparent.

If mining, real estate development, or telecommunications deserve the perks, why not the lowly sari-sari store at the corner street? Certainly, everybody else—including the magbobote and magtataho—also deserve the perks. But if everybody else deserves the perks, then we might as well abolish them so we could collect taxes from everybody; and so that government can have enough money to spend for the betterment of all, not just a few who are already so rich.

At some point we need to stop institutionalizing favoritism in the country’s economic policy. The way BOI and Peza are running things really looks like it’s rent-seeking plain and simple. In harsher terms, it may be wealth creation through bureaucratic corruption.

The Senate right now is reviewing the country’s fiscal incentives laws to “rationalize” them. We suggest that the Senate form a panel of independent experts to study extensively the country’s fiscal incentives system, including how the BOI and Peza have been implementing them. We suspect they are going to find tons of worms that are gnawing at the guts of the country’s economy.

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